Central Bank’s MPC Maintains Status Quo

The Monetary Policy Committee (MPC) resolved to allow the measures taken at the November 2014 MPC meeting to crystallize before any action is taken.
The committee’s 11 members voted for a retention of the Monetary Policy Rate (MPR) at 13 per cent, private Cash Reserve Ratio (CRR) at 20 p cent, public CRR at 75 per cent and liquidity ratio at 30 per cent.
The Committee’s considerations were based on expressed satisfaction with Nigerian economic growth and the December 2014 inflation print, with the current pricing of the naira versus the dollar, according to Cordros Capital, a research outfit.
Razia Khan, Managing Director, Head – Africa Macro Global Research, Standard Chartered Bank, the outcome of the MPC meeting was largely as expected, with the MPC voting to keep interest rates unchanged. 
“Although upside inflation risks are seen, there is little justification to tighten further just yet.  Given investor concerns over falling oil prices and forign exchange risks, as well as liquidity in the foreign exchange market and its implications for the index inclusion of Nigerian bonds, few portfolio investors would have been likely to increase their exposure to FGN bonds  – at this stage  – in response to higher interest rates.
The real point of interest is in terms of what happens next.  The moves to reduce trading Net Open Positions (NOPs) appear to favour more  (near-term) stability in the foreign exchange market – mainly because trading volumes in the interbank market have declined.  But this is at best a short-term fix, and cannot provide any buffer against long-term fundamentals.  The more restricted market is also a substantial negative for attracting new foreign portfolio investment into Nigeria.
“However, with elections due in February, we think the authorities will focus more on local conditions for now.  Stabilizing the foreign exchange rate is even more of a priority, and the tighter restrictions on interbank trading will likely stay in place”, said Khan.
She continued that, “whether we see further tightening of policy in March or beyond will depend on both foreign exchange moves and economic fundamentals.  Recent  foreign exchange weakness appears to be feeding into inflation with a considerable lag.  
“Food prices have also played some stabilising role, offsetting price increases in other items.  We would need to see evidence of a more significant inflationary threat for the authorities to tighten again.  Post-election, if weaker oil prices are sustained for some time, the emphasis may shift very quickly to what is needed to support the performance of the real economy, creating some uncertainty around our call for further tightening.  For the moment, the pace of passthrough of foreign exchange weakness into domestic prices is key to future monetary policy decisions”.    

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